China strengthens litigation framework through increased use of APAs and MAPs
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China strengthens litigation framework through increased use of APAs and MAPs

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Xiaoyue Wang and Choon Beng Teoh of KPMG China explain how recent developments affirm the programmes’ effectiveness in providing certainty to transfer pricing arrangements in China.

China’s advance pricing agreement (APA) regime has come a long way since its trial roll-out in 1998 followed by formal introduction in 2002. The latest statistics published by the Chinese State Taxation Administration (STA) show encouraging trends with the number of signed APAs hitting a record high in 2019.

China has also made good progress in resolving the backlog of mutual agreement procedure (MAP) cases even as it is seeing increasing applications by taxpayers. This is not least to make good on its commitment to the minimum standards agreed in the finalised G20/OECD’s BEPS Action 14 report (Make Dispute Resolution Mechanisms More Effective).

The efforts put in by China to provide a swift response to international tax disputes is crucial to its pledge to implement China’s opening-up policy. The STA has successfully eliminated or avoided double taxation of CNY 3.1 billion (approximately $478.7 million) through bilateral dispute resolution processes in 2019.

In this article, the authors examine the latest trends with APA and MAP cases in China and the latest initiatives by the STA to make the APA and MAP programmes more accessible and attractive to taxpayers.

Advance pricing agreements

The STA publishes the China APA Annual Report on an annual basis as part of its effort to inform taxpayers of the development of the APA programme. The annual report provides insights into the latest statistics and offers information on relevant tax policies, implementation procedures and development of China’s APA programme.

The latest 2019 APA Annual Report released in October 2020, as previously, recapitulates the progress of the APA programme. According to the statistics contained in the report, the STA achieved a notable milestone, signing 21 newly concluded APAs in 2019, comprising 12 unilateral APAs and nine bilateral APAs. These numbers are the highest reported in the STA’s APA statistics, which date back to 2005.

Another encouraging development noted in the annual report is the time taken to conclude an APA. In general, the STA aims to conclude unilateral and bilateral APAs within 12 and 24 months of the acceptance of the respective formal applications. Most unilateral APAs (89%) and bilateral APAs (62%) signed between 2005 and 2019 were concluded within two years of the acceptance of formal applications. It is worth noting that five of the nine newly signed bilateral APAs in 2019 were concluded within just one year of the acceptance of formal applications.

Additionally, there are matters of particular note for taxpayers concerning the use of transfer pricing (TP) methods in APA applications. Five of the newly signed APAs in 2019 were concluded with the adoption of the profit split method, a paradigm shift compared to past years. The 2019 APA cases that use the profit split method are, in fact, equal to the total number of APAs adopting that method over the past 14 years from 2005 to 2018.

The STA has been advocating the application of more complex TP methods and the need to reflect the location specific factors in the pricing of inter-company transactions. The latest development demonstrates that the Chinese tax authorities are more assertive by moving away from the commonly applied transactional net margin method to the profit split method when the cases warrant such application. These include cases where both parties to the transactions make significant contributions to value creation or cases involving location specific advantages.

Of the total APAs signed between 2005 and 2019, 141 APAs were related to the manufacturing industry, accounting for 80% of the total. Taxpayers in the manufacturing industry have always formed a substantial majority of the APA tally due to the historic nature of inbound investment into China. Interestingly, however, there are an increasing number of enterprises signing APAs in the last two years which operate in the wholesale and retail industry, i.e. 19 or 10% of the signed APAs between 2005 and 2019. With the diversification of China’s economy and further opening-up of the market, the number of APAs involving the service industry and other types of industries will unquestionably increase further in the future.

The annual report also provides a breakdown by transaction type. Between 2005 and 2019, 148 signed APAs related to the transfer of the right to use or the ownership of tangible assets, accounting for 61% of all transaction types. An upward trend is seen in the number of signed APAs that involve services transactions and the transfer of the right to use or ownership of intangible assets, accounting for 39% of the total. The promulgation of the Announcement of the STA on the Administrative Measures on Special Tax Investigations, Adjustments and Mutual Agreement Procedures [2017] No. 6 (Announcement 6) requires taxpayers to place emphasis on the analysis of transactions related to services and intangible assets. This has prompted the Chinese tax authorities to further tighten the scrutiny on these related-party transactions which, in turn, encourages taxpayers to apply for APAs to secure tax certainty on these medium to high-risk transactions.

Overall, the 2019 APA Annual Report affirms the determination of the STA to steadily promote the APA programme and to improve the quality of tax authorities’ services to taxpayers. The APA teams in the STA have grown steadily over the past few years to cater to the growing demand of multinational enterprise (MNE) taxpayers to access the APA programme to gain tax certainty and avoid costly and time-consuming TP audits. The demand will certainly continue to grow in light of the uncertain global tax environment, incentivised by the relatively speedy resolution of APA cases as seen in the annual report, as well as a more structured APA programme, e.g. the introduction of the six-stage processes for handling APA applications as provided for in the Announcement of the STA on Matters Regarding Enhancing the Administration of Advance Pricing Arrangements [2016] No. 64 (Announcement 64).

Taxpayer APA strategies: Pathways to access the programme

To make the APA programme more attractive, the STA has come up with innovative initiatives that not only speed up the APA process but also resolve other non-TP issues that may arise from TP arrangements.

A common grouse of taxpayers is that the APA process takes a long time. This deters many from applying for APAs, particularly some taxpayers with less complex TP arrangements which are subjected to the same full APA review process. The Shenzhen tax authorities piloted an initiative which led to the successful conclusion of a case through a simplified APA process. The pilot case involves a unilateral APA application by a taxpayer as with simple and clear related-party transactions and functional profile. This enabled the Shenzhen tax bureau to conclude its assessment quickly and an APA agreement was reached within a year of application. The successful pilot case opened the door to the conclusion of several more cases by the Shenzhen tax bureau under the simplified APA approach. The STA is now conducting research on the feasibility of implementing the simplified APA process in the rest of the country.

In another novel initiative, the STA agreed to coordinate with the Chinese customs authorities to negotiate and arrive at a jointly acceptable position from both tax and customs perspectives through an APA-like process. TP arrangements agreed through an APA or a TP audit can bring about adverse Chinese customs implications for taxpayers, and vice-versa.

In a pilot scheme, also in Shenzhen, a case is under progress where the STA and the customs authorities have entered into joint negotiations to resolve the double taxation of corporate income and import pricing under an APA/joint-ruling framework. Substantial progress has been achieved and a successful conclusion of this case will be a major step towards finding a solution to balance the competing interests of the tax and customs authorities.

Mutual agreement procedures

In approving the 2015 BEPS Action 14 report, the Inclusive Framework countries agreed to a minimum standard to resolve treaty-related disputes in a timely, effective, and efficient manner. Furthermore, the Inclusive Framework countries committed to timely and complete reporting of MAP statistics according to an agreed reporting framework.

In this regard, the OECD, in November 2020, released the 2019 MAP statistics under a new reporting framework covering 105 jurisdictions and almost all MAP cases worldwide. Unsurprisingly, the statistics showed that there was an increase in the number of MAP cases initiated in 2019 but at the same time there was an increase in the number of MAP cases closed.

Focusing on TP cases, the following observations can be gathered from the OECD report:

  • The number of TP cases keeps increasing. Approximately slightly more than three TP MAP cases were started every day in 2019. This amounts to about 1,200 new TP cases in 2019 alone compared to 930 in 2018.

  • The number of cases closed is increasing as well. Competent authorities were able to close more cases in 2019 than in 2018, but the increase in cases closed in 2019 could not keep up with the increase in new cases in the same period, resulting in growth in the closing inventory.

  • Outcomes of the closed MAP cases are generally positive. Around 85% of the MAPs concluded for TP cases in 2019 resolved the issues one way or another, which reflects the collaborative approach taken by competent authorities.

  • Cases still take a long time to be resolved. On average, 2019 MAP TP cases took approximately 31 months to close.

Specifically in relation to China, the total closing TP case inventory (for cases pre- and post-January 1 2016) reduced from 59 in 2018 to 54 in 2019. More emphasis is placed on clearing the backlog of the pre-January 1 2016 cases with nine case closed in 2019. In contrast, six cases started after January 1 2016 were closed in 2019. There were 10 newly started TP cases in 2019.

Generally, China took 28.8 months to close cases started after January 1 2016. While this is higher than the 24 months’ timeframe as agreed under the BEPS Action 14 report, the timeframe is well under the global average of approximately 31 months.

Of the cases closed in 2019, 67% achieve some form of positive outcome (60% of the cases attained full or partial elimination of double taxation while 7% were resolved via domestic remedy).

China’s MAP programme has also stood up to international peer review. The peer review process involves an evaluation of China’s implementation of Action 14 minimum standard through an analysis of its legal and administrative framework relating to the MAP, as governed by its tax treaties, domestic legislation and regulations, as well as its MAP programme guidance and the practical application of that framework.

The review process is a desk review and is conducted through a specific questionnaire completed by China, its peers and taxpayers. In the MAP Peer Review Report (Stage 1) published in November 2019, the OECD noted that China was considered to meet most elements of the Action 14 minimum standard including:

  1. MAP is accessible to eligible taxpayers;

  2. Its regulations contain clear and comprehensive guidance on the availability of MAP and how China applies this procedure in practice;

  3. China’s competent authority operates fully independently from the audit function of the tax authorities and the performance indicators used are appropriate to perform the MAP function; and

  4. China monitors the implementation of MAP agreements and no issues have surfaced throughout the peer review process.

Areas for improvement and recommendations noted in the peer review report include:

  1. To update one tax treaty to be compliant with the requirements under the Action 14 minimum standard through the multilateral instrument;

  2. To ratify the Multilateral Instrument it signed in 2017 as quickly as possible;

  3. To have in place a documented bilateral consultation or notification process for situations in which its competent authority considers the objection raised by taxpayers in a MAP request as not justified; and

  4. To include contact details of China’s competent authority in the MAP guidance.

The authors understand the STA took note of these recommendations and any progress will be reported in the stage two report, which details the monitoring of the follow-up of any recommendations resulting from the stage one peer review report.

Looking ahead

The uncertainty in the global economy and the challenges of trade liberalisation are prompting governments around the world to increasingly compete for tax revenues. In view of the disruption created by the global pandemic, certainty is increasingly valued in the world of business. Taxpayers yearn for an environment that provides fair and certain tax administration to facilitate cross-border investments.

In this regard, the Chinese tax authorities continue to fulfil their commitment to improve the business environment and promote unimpeded trade and investments in China. Taking note of the new initiatives and pilot schemes introduced by the STA and the local tax authorities, taxpayers should fully assess the advantages the APA and MAP programmes would bring to their management of tax and TP risks.

Xiaoyue Wang

Xiaoyue Wang


KPMG China

T: +86 10 8508 7090


Xiaoyue Wang is the transfer pricing (TP) national leader of KPMG China.

Xiaoyue joined the team in November 2016, and previously had a long and distinguished career at the State Taxation Administration (STA) of China, rising to the position of deputy director general of the international taxation department. She was the top TP official at the STA for many years, and represented the Chinese government in international negotiations on tax policy and administration.

Xiaoyue led the development, drafting and implementation of all major TP, advance pricing agreement (APA) and anti-avoidance initiatives, both in terms of legislation and tax administration, and developed a highly effective national structure for TP matters and anti-avoidance administration within the STA.

Since joining KPMG, Xiaoyue has led many large TP engagements, including bilateral APAs, MAPs, TP defence, BEPS documentation and global value chain restructuring, etc. Her work has involved companies all over the globe and in a wide range of industries, including electronics, automobiles and finance.

Xiaoyue has a PhD in economics from Renmin University of China and an LLM in taxation from Golden Gate University in the US.

Choon Beng Teoh

Choon Beng Teoh


KPMG China

T: +86 21 2212 4527


Choon Beng Teoh is a director with the global TP team of KPMG China and is based in Shanghai.

Choon Beng has experience in multi-jurisdictional planning studies, dispute resolution, value chain analysis and restructuring of operating models, as well as leading and managing global TP documentation projects. His client portfolio includes top-tier multinational companies across a variety of industries, including pharmaceutical, automotive and retail. He also occasionally co-authors articles on China-related TP topics for publications.

Choon Beng graduated with a law degree from the London School of Economics and is a chartered accountant with the Institute of Chartered Accountants in England and Wales. Prior to joining KPMG China, he practised in another leading accounting firm in London in the area of international tax and TP matters.

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